There has been much debate in the industry around whether or not setting up a limited company can beat the tax increases. However, as a result of the Summer Budget, radical reforms essentially mean landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate the profit on which to pay tax. In other words, tax will be applied to the rent received rather than what’s left after the interest has been paid.
It can be argued that the private buy-to-let landlord will be disadvantaged compared to larger, corporate landlords. In fact, some investors have started to mitigate this loss by increasing their use of limited company structures by transferring their property portfolio to a corporate structure to sidestep cuts to mortgage tax relief introduced by the Chancellor. We could also see an upswing in landlords switching their investment from residential to commercial or mixed use properties, as the same rules do not apply.
However, there are downsides to holding a buy-to-let portfolio in a limited company such as capital gains tax, stamp duty, legal set up costs and corporation tax on income. In addition, although the mortgage choice in the buy-to-let market has improved, only 12% of products are available to limited companies, as the lenders offering new products in this area are the more specialist buy-to-let or commercial lenders.
Although there are several factors to consider when setting up a limited company, many intermediaries predict purchases of homes by limited companies will increase further. This appears to be the case as more lenders launch with limited buy-to-let mortgages, resulting in a surge in applications, as landlords prepare for the impending tax hikes this April.
However, it is certainly feasible that this could be seen as a loophole by a future government. The investor would therefore need to take tax advice from a qualified accountant to make sure it’s worth transferring the properties.
Although there is no telling if it will be passed as a law, it is important that investors spread the risk. Therefore, due to increasing speculation around buy-to-let landlords using limited company structures to purchase properties, the commercial finance industry must continue to be vigilant and fully prepared for any further tax or regulatory changes that might arise in the near future.
Rob Collins is director of commercial finance at Brightstar
